Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Europe is at risk of becoming a buy-and-dump IPO market. Initial public offerings of shares in new companies may be getting done, but their pricing and subsequent market performance suggest that investors’ commitment is only skin-deep.

This adds up to a big challenge for Philips, which said Tuesday it will spin off its lighting business.

The first half of 2016 was always going to be a difficult period for European IPOs. An early Easter holiday curtailed the window for getting deals done at the beginning of the year. Then there’s the uncertainty generated by the U.K.’s June referendum on European Union membership. And economic growth remains sluggish across the region.

Yet investors have had one good reason to buy, if they can get in on the initial allocation. The equity market volatility seen in the first quarter has left them looking for quick sources of return to improve their performance. IPOs are a boon in this context: they are sold at a discount to fair value and have historically enjoyed a bounce in the first weeks of trading.

Recent deals suggest that even when investors are buying they have little staying power, and that liquidity is tight. 

Downward Trend in European IPOs
Philips may be approaching a softer market as risk aversion hits the volume of announced share sales
Source: Bloomberg

Spanish pizza delivery company Telepizza fell as much as 19 percent on its first day of trading last week. In the aftermath, compatriot theme park operator Parques Reunidos dipped as much as 9 percent following its debut, and despite recovering still trades below its issue price. German wind turbine marker Senvion, which completed its first share sale in March, is about 3 percent below its issue price.

Meanwhile, Italian lender Banca Popolare di Vicenza couldn’t find sufficient support for its offering on Tuesday, even at the bottom of its price range.

Italian gym equipment maker Technogym, which listed today, seems to have learnt the lesson. It priced towards the bottom of its range, a level at which demand was four times supply. With that strong support in the IPO, the shares on debut are up more than 10 percent.

For Philips, it is hardly encouraging. Its lighting business is a challenging growth story: modern light bulbs last longer, so consumers are most likely to buy them when they are moving house and not much afterwards.

The company has already tried and failed to drum up interest in the unit from an industry buyer, so stock-market investors cannot put much faith in the company ever being taken over at some point in the future, and their holdings getting bought out at a decent premium.

Philips’ deal has one thing going for it: size. Analysts suggest the company could be worth about 5 billion euros ($5.8 billion), which means the market for the shares will be reasonably liquid from the outset, even though Philips is to sell only 25 percent at first. So it may be less susceptible to big gyrations after listing.

In this IPO environment, bigger may be better.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net